Today’s doom and gloom report
Indefatigable doomsayer (and sometimes excitable fellow) Ambrose Evans-Pritchard has quite a lot to work with these days. Here’s his commentary on a forecast from the Royal Bank of Scotland:
“A very nasty period is soon to be upon us - be prepared,” said Bob Janjuah, the bank’s credit strategist…who became a City star after his grim warnings last year about the credit crisis proved all too accurate…”Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point…The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets…”
It’s not just RBS that is sounding the alarm. Morgan Stanley apparently has a similar report, according to Evans-Pritchard:
“We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe,” said a report by Morgan Stanley’s European experts…”The tensions will not disappear into thin air. They will find fault lines on the periphery of Europe. Painful macro adjustments are likely to take place. Pegs to the euro could be questioned”…The point of maximum stress could occur in coming months if the ECB carries out the threat this month by Jean-Claude Trichet to raise rates. It will be worse yet — for Europe — if the Fed backs away from expected tightening. “This could trigger another ‘catastrophic’ event”…
Morgan Stanley says the current account deficits of Spain (10.5pc of GDP), Portugal (10.5pc), and Greece (14pc) would never have been able to reach such extreme levels before the launch of the euro. EMU has shielded them from punishment by the markets, but this has allowed them to store up serious trouble. By contrast, Germany now has a huge surplus of 7.7pc of GDP.
The imbalances appear to be getting worse. The latest food and oil spike has pushed eurozone inflation to a record 3.7pc, with big variations by country. Spanish inflation is rising at 4.7pc even though the country is now in the grip of a full-blown property crash. It is still falling further behind Germany. The squeeze required to claw back lost competitiveness will be “politically unpalatable”.
Morgan Stanley said the biggest risk lies in the arc of countries from the Baltics to the Black Sea where credit growth has been roaring at 40pc to 50pc a year. Current account deficits have reached 23pc of GDP in Latvia, and 22pc in Bulgaria. In Hungary and Romania, over 55pc of household debt is in euros or Swiss francs.
We have wondered for some time what would happen with the euro and EU economies when the stresses of major differences in economic policies, inflationary pressures, and productivity became too pronounced to paper over. Apparently we may find out soon.